Q2 2025 Orchid Island Capital Inc Earnings Call

Good morning and welcome to the second quarter 2025 earnings conference call for Orchid Island Capital. This call is being recorded today. July 25th 2025

At this time, the company would like to remind listeners that statements made during today's conference call related.

At this time, the company would like to remind listeners that statements made. During today's conference call relating to matters that are not historical. Facts are forward-looking statements subject to the safe harbor provisions of the private Securities. Litigation Reform, Act of 1995. This is our caution that such for looking statements are based on information currently available on the company's management.

Speaker Change: On the Management's. Good faith. Belief, with respect to future events are subject to risk and uncertainties that could cause actual performance or results of different materially from those expressed in such forward-looking statements important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on form 10K. The company assumes no obligation update. Such forward-looking statements to reflect actual results changes in Assumption or changes in other factors affecting forward-looking statements. Now I'd like to turn the conference over to the companies chairman and chief executive officer. Mr. Robear Carly. Please go ahead, sir.

Speaker Change: Highlights, Jerry will handle that for us. I will go through the market developments.

Speaker Change: And focus on what happened, how that impacted us our in performance and our decision making and then Hunter will go over the portfolio, characteristics in our hedge positions, uh, before we open up the call to question. So with that, I'll turn the call over to Jerry.

Jerry: Thank you, Bob, um, if you turn to page 5, we'll start with the financial highlights of the quarter.

Jerry: Um, if you want a quarter, we reported a loss of 29 cents per share compared to your income of 18 cents per share in q1. Um,

Jerry: Should be noted, that excluding real life and unrealized losses, that were the net income of 16 cents per share, which is the same as q1.

Jerry: um,

Book value decreased from 7.94 per share at 331 to 721 at 6:30. I total return to the quarter was -4.66 percent compared to 2.6% at in q1. And we reported 36 Cents of dividends in both quarters.

Jerry: Turning to page 6, we'll go to portfolio highlights.

Jerry: Um, we had average MBS during the quarter of 6.9 billion compared to just under 6 billion in q1.

Jerry: We had our leverage ratio at 6:30 was 7.3, which is down from 7.8 at 3301.

Jerry: Our.

Jerry: Prepayment speeds during Q2 was 10.1%, compared to 7.8% in q1 and our liquidity at 6:30 was up to 54% from 52%.

Jerry: On page 7 is our Sunrise financial statements. These are the same as what was in our

Um earnings release last night. And they'll we'll have more detail presented with our 10 q, that will be filed today. So with that, I'll turn it back over to Bob. Thanks Jerry.

Bob: I'll go through the market developments for the quarter.

Bob: And then, as we all know, there were 2, big events that occurred in the quarter 1, much greater than the other, the first of which was the reciprocal tariffs announced in early April, what was known as Liberation day later. In the quarter, uh, the administration's what became known as the 1 big beautiful. Bill was passed was signed into law on July 4th, although the heavy lifting

Bob: To get the bill to the point where it could be signed occurred, uh, late in the quarter, and it definitely had an impact.

Bob: Uh, on the market and Outlook, although much less what occurred early in the quarter.

Bob: Obviously what happened in early April was, you know, not quite as bad as the onset of Co in March of 2020. But pretty significant, there was obviously a lot of force deleveraging and there was a lot of concern in the market about host of things, the sanctity of the dollar and the, uh, flight of capital of the US, and so forth. So it was clearly a very chaotic period. Uh, that being said, uh, given that we've been doing this for a while. We were quite well, positioned for that. We had very high cash positions. Our leverage was on the low end of our range.

Bob: As a result of that, we were able to limited limit the deleveraging or selling, if you will to less than 10% and we, in fact, actually bought back a little over 1.1 million shares really in the quarter out of substantial discount.

Bob: Uh, once the dust settled there in the quarter and we kind of, uh, basically grind it sideways. Uh, we were able to, we maintained a defensive position, but we were able to sell some shares. Uh, we actually did. So at a slight discount to book, but we were able to generate a nice cushion, a cash cushion, if you will, we, as I mentioned, we were still defensively positioned. We kept the leverage at the low end of the range.

Bob: So now I'll go through the deck and the slides and try to focus on the things that happen that were of most relevance to us. And there were 2 primary takeaways, I want to focus on

Bob: Curve is wide and has been growing and that's significant for us. So that's kind of the first takeaway. So swap, spreads are becoming extremely negative, and for levered, MBS investors who have to hedge their positions. Uh, using swaps is becoming a very attractive option for us because of the spreads that are available in the market as a result of that. So that's kind of 0.1. If you go to point 2, uh, that's on slide 10. So here we show some of the mortgage metrics. The top is just the spread that we show. This is, you know, a lot of history, 15 years of History going back. Current coupon spread to the tenure, but that's a 10 year treasury not swap. As you can see, with respect to that spread. I mean, it's, it's still wide by historical standards, but it's well off the extreme levels. We saw in late 2023,

Bob: But in the case of swaps, that's it's not the case. Uh, if you look at the bottom left, what we did show, this every quarter, these are normalized prices for a selection of anime, 30, or coupons. So, all we do is we set the price equal to 100 at the beginning of the quarter. And as you can see, I want to point out

Bob: That even though the return for the index, the mortgage index and the 30 year sub component were positive for the quarter that's just because there's an income component of Total return price returns was negative or or close to negative in the case of everything but F**** 6 is. So you can see that the prices just did not fully recover. And in fact, as we've entered the Third,

Bob: Third quarter. They've continued to soften. So that's just keep that thought in mind for a second. When you consider the following, when you look at slide 11,

Bob: This is what a picture of volatility and, you know, in this case we're using a pretty common measure, 3-month by 10, your normalized ball. Uh this is what we would refer to as gamma. But notice that in this 1 year, look back period as you saw in early April ball Spike, which is what you would expect. And so that was the high reading for this 1 year period but notice over the course of the quarter, how much it fell. So we went from the local high to the local low, over the course of 1 quarter.

Bob: And if you look back in the middle of that graph, say the late 2024 and 25 will involve was also low, what we just were doing very well.

Bob: But you look at where we are now with Volvo at the lowest levels of this period and they're not. So it's kind of that's the second. Takeaway is this combination of relatively weak mortgage performance, even in the face of low volatility which is counter to what we would expect. And so that means that you have attractive assets to acquire and very effective ways to hedge them with the swap market. So those are the 2 primary takeaways, I want to focus on continuing on with the rest of the deck. You look at slide 12 on the left hand side, you see, various swap, teners, sevens 5,

Bob: So I'm sorry, second 2-year, 5-year 7-year and 10 year. And as you can see in this graph right around the early part of April, these things drop down precipitously, but note how the fact that they didn't recover, they've trended sideways since so. And you know, what's driving this? And what is driving? This is the falling with the government running persistent deficits and the market and anticipating continued deficits, especially after the passage of the 1, big beautiful bill, that means that the market is in effect anticipating, uh, heavy treasury issuance. So it's you know, in the face of very heavy treasury issuance. It's as if nominal treasuries, are cheapening to it. Effectively has become the new risk-free asset, which is a swap yield. And so in, since the market expects this to continue and I mentioned earlier that the 1, big beautiful, bill was passed. And while it's going to be very stimulative for the economy, it also, if you look at it from a perspective of fiscal deficits it's not likely.

Bob: To cause a shrinkage of those. So, a continuation of deficits which means nominal treasuries have been cheapening relative to swap yields and that, that appears to be something we expect to continue for quite some time on the bottom, right? We show the composition of our hedge book, uh, weighted by dv1. And as you can see, swaps, the green area are over or almost 80% Futures at 21, uh, given what I've just said, we would expect that composition

Addition to shift going forward uh, in favor swaps more. Uh, and for the obvious reason, moving on to slide 13. This is a picture of the mortgage refinancing and mortgage housing market. Uh, on the left, you can see the refi index, uh, versus mortgage rates. You know, The Song Remains, the Same the refi index is at historically, low levels, mortgage rates are high. But the reasons I've been discussing, I would expect that those would continue to stay high.

Bob: Sales were released, um, home prices are at all-time highs. They continue to hit all-time highs. Uh, the inventory to sales ratio, which was at 4.7 typically, 6 is considered kind of middle of the range, but that being said, that's the highest reading since 2016. So, inventory levels are building, and when you consider that the consumer is relatively tentative, given the uncertainty around tariffs and potential job losses, affordability, is it multi-years? If not decade lows, and rates are high and likely to stay higher? You know, what does this mean? Well, refinancing activity is likely to stay quite low and what that means, then for carry particularly up, higher coupons is the Terry. Could be very attractive. So I'm trying to paint a picture here, that shows that, you know, based on what's going on in the market, the outlook for mortgage and mortgage investing could be quite attractive, a few more slides before I turn over to 100 slides.

Bob: 14. I've been showing this 1 for years, uh, or at least a quarter is rather and you can see, I just have on here the GDP of the US in dollars versus the money supply and the red line. As you can see, is the government continues to run, uh, large deficits. And it's keeping growth elevated. It's really butchering growth. And when you look at for instance, what happened in 22 and 23, when the Federal Reserve raised interest rates by over 500 basis points, yet the economy never really

Bob: With branded a recession, and even today in the face of these tariffs, you know, the labor market, appears resilient the unemployment rate hasn't grown and spending. Uh and you know, consumer spending has remained uh at least resilient if not, you know, very strong and uh what this really means is that you have this deficit spending which is really preventing the economy from slowing in the face of well, what otherwise be, uh, typically slowly upon me quite a bit, whether it's, you know, uncertainty surrounding, uh, the tariffs or the FED hikes. And so, I expect that to continue, which means that the economy would expect to continue to be quite robust. I want to go to a few slides in the appendix. Uh, I'll give you a moment to turn the page if you look for slide 26.

Bob: This is new uh what we're showing is the term premium as measured by the ACM model. I am not an expert in the ACM model but I can tell you that it is 1 W Used and well respected and what you see in this data, this goes back, 25 years is that for a long period of time up until around 2015, term premiums were positive and in some cases, quite high up to 300 basis points. But then we entered a long period of where they were negative, but rarely positive, but that's changed. And we're starting to see the move higher and for the reasons. I've been discussing. I think that that's going to continue to be the case.

Bob: So with respect to say for instance the curved shape, while we may not get as much fed Cuts as many fed Cuts as the market anticipates, we met but even if we don't I think this upward pressure on longer term rates is going to keep the curve steep which is again, attractive for investors, such as ourselves on slide 27, another new slide. What we're showing here is the spread of the current coupon mortgage to both a 7-year swap in the case of a blue line and a 10 year, swap versus a red line. As you can see where we are. Now we're in the neighborhood of 200 basis points for the current coupon mortgage to a 7-year swap. We haven't been at those levels since late 2023 when the Fed was just finishing up an massive tightening cycle and mortgages had suffered mightily. So, here we are right back in those levels. And as I also, you know,

Speaker Change: In conjunction with what I've been saying about the market. Generally speaking, all this paints are very attractive picture for mortgages. Uh, the final slide before I turn it over to Hunter. It's like, 28. I've been talking about this 1 as well for quite a while. What you see here are Bank holdings of mortgages as well as the Federal Reserve. And as we can see, in the red line, effect just continues to let the mortgages run off their balance sheet. Banks have been growing slowly but very slowly but the rate of growth is minimal and they represent 1 of the most. If not the most important marginal buyer of mortgages. Uh if you look at the mortgage market today,

Coming in and buying mortgages and really, I think that's what a big reason why mortgages have yet to perform well and we still trade at these cheap levels. So I'm going forward, what could change that? What could cause the banks to become more engaged? Well, 1 of the points mentioned often is the uh, uncertainty surrounding tariffs. Hopefully that's behind this relatively soon. We'll see a regulatory relief. Uh, that's in the works. And then obviously Fed rate cuts which would further steepen, the curve. All of these could uh combined to cause the banks to be more engaged and that would represent it very much a big uh win behind the in the sales of mortgages. I guess a final 1 might be if the economy does get really strong and deposit growth grows that that the banks they could buy more but it definitely is a source of potential tightening uh but we're just not sure when in your thoughts going to occur. So that's kind of my synopsis of all the macro developments in the market and what those mean for us. And with that, I will turn it over to 100.

100: Thanks Bob. Um, if you're following along we'll go back towards the uh Investment Portfolio section. Uh starting on slide, 16, uh, during the second quarter, we continue to reposition our portfolio up in coupon way. The average coupon increase from 5 to 5:45 from 5:32, uh, at the end of the first quarter, while the realized yield slightly declined. 541 to 538 our uh, economic interest spread remains healthy yet.

100: 243 basis points, we uh, rotated out of lower payup, Fanning fours and fives 334, and 137 million respectively, and increased 5 and a half, sixes and 6, and a halfs by 555 million, 145 million, and 86 million respectively. Uh, this marks a continued strategic shift away from our barbell approach towards a more concentrated production coupon bias. This says, uh, service. Well, on this recent curve, steepening environment that Bob has been discussing

Speaker Change: Trying to select 17. This slide shows the evolution of our coupon allocation over the past couple of quarters. Uh, you can see the meaningful Decline and the exposure to, uh, 3 and a half through 4 and a half. Coupons, and the corresponding rise in 5 and a half to 6 and a half percent buckets.

Uh, this shift is deliberate lower coupon pools. While theoretically easier to hedge have shown elevated spread volatility during risk off events. Largely due to Redemption driven selling by the money manager community. That Bob was just talking about

Speaker Change: Uh, the combination of the height and spread volatility, considerably lower, realized yields, and relatively higher hedge cost. Resulting from a steeper yield curve. Have all contributed to the rationale for us to shift away from the barbell into a more production coupon Focus.

Turning to slide 18, our repo funding remains very stable. Uh, we had a blended rate of 448 in the second quarter which was basically unchanged from the first quarter.

Speaker Change: Our average maturity short and slightly to 35 days. Um are all in economic cost of funds Rose modestly from 283 to 295 mainly due to swap portfolio Dynamics.

And we ended the quarter with our leverage at 7.3, uh, down slightly from 7 and a half, reflecting our disciplined focus on keeping, uh, leverage stable and of all the times.

Speaker Change: The funding environment remains very constructive with repo, spreads relatively stable outside of period in tightness.

Speaker Change: And that June at June 30th 2025 and continuing into the third quarter, we had excess borrowing capacity with, uh, 24, active lenders. And a few more sources of funding in the queue

Uh, turning to slide 19.

Speaker Change: Uh, to just going to briefly discuss our hedge positions. Um, our hedge ratio stood at 73% of our repo, balance at quarter in down slightly due to the accent asset miss, mix shift that I discussed earlier. Uh, going forward, we'll likely shorten, the Hedge mix, and thereby increase the, uh, notional.

Speaker Change: Balance of the hedges. Uh, commensurate with the shorter. Duration of the assets we've been adding uh, the book is still biased towards the interest rate swaps um as discussed earlier 78% of our db01 in fact. Um and the rest is in Futures predominantly um treasury futures.

Uh, current configuration leaves us. Um,

A higher rate bias and a steeper curve. Um, Mark to Market on the hedges in the second quarter told 47 cents a share or 538.8 million with the majority stemming from our swap positions. Uh, both swaps and treasury. Futures contributed to losses the treasury Hedges outperformed, our swap Hedges. And this reflects the sharp tightening and swap spreads, uh, following April's hedge fund stops. Uh, when leopard players were forced to unwind basis trades, um, under stress, and the story of the price of the treasury curve.

um,

Speaker Change: Going to slide 20. Let's have a couple points to make here. You'll see the full breakdown. This is this will show you a full breakdown of all of our Hedges small, Futures and TBA positions. Um, our swap book had a weighted average maturity of 5.7 years with a average fixed rate of 330. Um, Futures remain concentrated in 57 and 10. So the FD is the Ty and the Ultras and at the end of the quarter, we didn't have any short tbas or swap ship positions.

Speaker Change: It's like 21 shows how combination of the assets and the hedges. Uh

Speaker Change: Lead to a or risk profile. Um, it shows our interest rates potentially 1 shows our interest rate, sensitivity by coupon our portfolio is now. Um, as I mentioned, more weighted towards lower duration assets, and we have maintained a slightly higher, uh, duration on our hedges,

Speaker Change: Giving us the curve steepening bias. But I alluded to um, we expect positioning to be uh, this current positioning to be resilient and the bear steepener or higher rate scenario and uh while while still capturing meaningful carry um because the spreads of mortgage assets over swaps are very elevated at the moment.

Speaker Change: Uh, slide 22.

Speaker Change: um our dollar dvo 1 for rnbs is 2.285 uh million while the hedges is 2.492 million leaving a modest negative duration, gap of 207 k,

Speaker Change: This equates to 0.17% exposure in an up 50 parallel shock.

Speaker Change: Uh, which is very manageable. Our strategy Keeps Us agile across rate paths with modest exposure, as I alluded to, to curve shape. And, uh,

Speaker Change: And, um, slide 23 is our prepayment experience. Uh, prepayments remain, pretty muted overall um with the slight seasonal, uptick higher coupons, continue to see um, very modest speed increases um,

The most of them are still in kind of the mid to high single digit range uh and our Deep Discount positions uh, continue to benefit from favorable prepaid speeds. Um, you know, mostly in kind of the mid to Upper single digit range.

Provides a consistent source of income.

Speaker Change: Um just kind of wrapping things up uh and giving a little bit of an Outlook uh Q2 open with a severe volatility, reminiscent of March 2020, tariff amount, the Tariff announcements triggered, a violent risk off move and widespread the leveraging. Um, thanks to our ample liquidity and strong hedge positioning. We avoided large

Speaker Change: Scale forced sales, uh, as the market stabilized. We raised 140 million in new equity and deployed it into higher coupon specified pools, expanding the portfolio modestly. Uh, by quarter inch Mark to Market hedge losses total of 47, uh, since per share of 53.8, with swaps accounting, for the disproportionate share,

Um, going back. This is due to the, the violent, uh, swap spread tightening move that we saw in April, uh, portfolio shift towards higher coupons, as short. And so, overall, duration, and as a result, um,

Speaker Change: our hedge ratio as a percent of our repo, balance declined slightly, uh, going forward, we met, uh, modestly narrow, that Gap. Uh, looking ahead, we believe the investment environment for agency rnbs remains extremely attractive production coupon. Spreads are apparently 200 basis points, roughly over swaps, which is uh, historically wide level that presents, a very compelling Total return potential, uh, even with that some sort of catalyst driven basis recovery.

Speaker Change: Coupon allocation and, uh, reduce leverage also provide us with a lot of flexibility. Going forward to be opportunistic.

Speaker Change: Uh, our higher coupons specified pools offer, a lot of carry and, uh, our head structure by being biased towards slightly longer. Tenants is designed to mitigate upward, uh, upward interest rate, shocks, the effect of upward interest rate, shocks, and a steepening curve.

Bob: um, so with that, I'll turn it back over to Bob for some uh

Concluding remarks, thanks Hunter. Uh, just a couple of things I'll mention before we turn over to, uh, question and answer. Um, we need to dwell a lot on funding. We have seen some volatility and funding spreads around month quarter. And year end, uh, 3 4 5 basis points generally is the range. Uh, otherwise I would say funding, has been stable, we've had no issues whatsoever. Adding uh, repo counterparties when we need it, you know, as we've seen we've been growing. So if anything completely here from our repo counterparties is they are asking for more bonds, not less. Uh, so I would say, you know, characterize funding as ample for our asset class with spreads that are somewhat choppy around period ends, but otherwise fairly stable and then I suspect we may hear this question but I'll be glad to talk about it more. But with respect to GSC privatization, um I think it's not on

Bob: The immediate Horizon, I think it could happen, but our basic takeaway is that with mortgage or housing affordability at multi-decade lows, anything that has any risk of causing mortgage spreads to widen, is not something that's going to be pursued and even if it does, uh, the president is already said, I don't know, it's just a statement not law but saying that you know, they would maintain the implicit guarantee of mortgages. So

Bob: Uh, that would basically de-risk that if it worked. Um again, you know who's to say if that actually became law but at least with the perspective of the current Administration and they would try to maintain that. So A couple that's about it. Otherwise I would just, you know, reiterate um, we expect the market to stay favorable for mortgages. Um, and we talked about swap spreads, uh, being where they are that, that could continue to erode. We'll see what this priced in the market. I think it's quite a bit, but it could potentially get worse. Otherwise, you know, involving low, uh, curved steep uh, and uh, some mortgages looking quite attractive from a carry perspective. I'll build well, so with that, I'll turn the call over to questions. Operator.

Speaker Change: Thank you, ladies and gentlemen, if you have a question or a comment at this time, please press star 1, 1 on your telephone. If your question has been answered, you wish to remove yourself from the queue? Please press star. 1. 1 again, we will pause for a moment while we compile, our Q&A roster.

Jason Weaver: Our first question comes from Jason Weaver with Jones trading, your line is open.

Jason Weaver: Hey guys. Good morning.

Good morning, Jason.

Uh so I I I I get a number of about 18.8 million in increase in shares over the quarter I guess that squares with 140 million Capital raised mentioned. Um I wonder you know what's your position towards raising additional Capital here? Given uh the incremental Roe opportunity that you're seeing

Jason Weaver: Well with technical where the stock trades. Um we would like to see it obviously higher. Uh let's just talk about our Lees. I would say Obviously it depends on your coupon, mix and leverage ratio but let's just assume for the moment, a leverage ratio of 8, which is above where we are, but it's a nice round number and I think that increasing our leverage could be warranted in this environment, given everything we've said. So let's just start with 8 and our current coupon mix. In other words, what we have in the portfolio today, I would say our lessor 16, maybe 16 and a half.

Jason Weaver: If you were to stretch the composition, buys it more up in coupon. Uh, you could probably get to about 18. So that's kind of the range. I would say, which is available in the market and, um, what terms of capital raising, its, you know, question of where the price is, uh, we will accept slight, uh, dilution to book which we did in the second quarter, uh, given the, you know, the chaotic nature of the market and the fact that spreads were so attractive, uh, but going forward, ideally we would like to be at book a better all the time and these are still attractive levels, uh, which we really haven't seen in a while.

Jason Weaver: Risk in those, you know, say 6 and 6 and a half pools. I see either a point or 3 points of Premium today on generics um and maybe that just squares with your view that you know rates, stay higher for longer in the long end.

Yeah, I would say so and we tend to buy and I'll let hundreds speak to this more like we tend to buy lower pay up uh poles and the prepayment experience on those has been very good. Uh, the housing market is in a real challenging situation with from a perspective of affordability and the ability for people to refinance and it with the Curve saying, the way it is, what deficit. It's running the way they are. Uh and the economy is strong and resilient as it is, it's really hard for me absence to some external shock to see a big rally in the line. And now you could argue that's the obvious pain trade it is. But uh, I think Carrie absent in a shock in higher coupons is is very attractive.

Yeah, got it. Oh, go ahead. First of all, I just to chime in on that. I, you know, all of our premium specified pools are, you know, have some sort of a story to them. So that's the kind of first line against, uh, in against, um, you know, some sort of a large rally and, and, and premium risk. So, we've, uh, focused on stories that are, um, relatively, uh, inexpensive. Um, you know, try to kind of focus inside of an extra point, but there's no stories of held up really well.

Jason Weaver: We've had these small, you know, kind of micro refi waves over the course of the last year. So, and, um, so I I think we're well, positioned. We still do have uh, a decent portion of the portfolio, uh, in the discount coupon so that always helps in in that big rally scenario. Um, we would see expected to see those assets do very well while the higher coupon specifically like the 6 and a halfs and maybe even the sixes um under underperform a little bit and and we've seen that happen as we've um

Jason Weaver: You know, pushed towards the lower end of the rate range, um, here in the last several months, and, um, it the strategy seems to be working relatively. Well, we keep enough, um, Group B enough exposure to discounts, even if they're more recently, just slight discount. So like the fives and the 5 and a halfs, um, that I think we're pretty well, Diversified for both, uh, little rally and refi wave, as well as a sell-off. That's that's the other side of it. Is the sixes and 6 and a halfs are done incredibly, well, as we push towards the higher end of the recent range, so

That's how we think about it. Got it, thank you and 1 more. If I met, um, did you give an updated uh quarter to date book value? I apologize if I missed it or the prepared remarks

Jason Weaver: Uh, we did not and as of last night and these numbers are not audited. Obviously it's just our best guess estimate. We were down about 3 cents quarter to date.

Jason Weaver: About 3%, 3 pennies.

3 cents. Thank you very much. Appreciate the time.

1 moment for our next question.

Our next question comes from my government with citizens JMP, your line is up from

Speaker Change: good morning, guys. Hope everything. Hey, hope. Uh, everybody's doing well. Uh, thanks as usual for the, uh, for the details slide deck. Um, just a quick question on, uh, prepay speeds. There was a bit of a spike up in the second quarter. What, what is your, um, sort of outlook for the third quarter, um, in terms of prepays?

I would say very muted, um, you know, consider that the second quarter is typically the peak seasonal period. Now, that's not a premium story or discount story, that's just, you know, the nature of the turnover. Uh, and it was very muted given that and that this the, the briefs refi Spike was really just because of the rally that occurred early in the quarter. I don't expect that to uh to continue much at all. And um, you know again if the extent we continue to see pressure on longer term rates,

Uh I don't really see how you can have that. Come back, meaningfully.

Speaker Change: I would say I expect them to be muted. Yeah, and we've added, you know, part of that was just the natural seasoning of the portfolio um, in conjunction with a small pre-file opportunity, um, similar to sort of what we saw at the end of, um, let's see what September October of of last year. Um,

Pushing into December and January speeds. So, uh, I think going forward, we should be good shape and, and we've also added a lot of

New issue, spec pools and the upper coupon range. So that should pull that weighted average speed down a little bit, going forward.

Speaker Change: paid or low 9 handle, as opposed to

Speaker Change: Almost 8 in the first quarter, you'd say.

Speaker Change: uh,

Speaker Change: Yeah, I don't have that in my phone. What size is that on?

23.

Speaker Change: Yeah.

Speaker Change: I mean that the, um,

Speaker Change: What was the 3 months? Be was 89? Is that what you're referring to? And then, 144 and someone stick this? Yeah, I don't know if we get, uh,

Speaker Change: Little digits in those coupons, but I think they will remain in the teams, uh, with the possible exception of 7. Um, so I don't even the mid load of mid teens, I would think by the, you know, end of the year. So I think that the carrying those is going to continue to be good and uh, the combination of relatively muted speeds and the dollar prices that we're looking at the yields and those are in the mid, the high 5S I believe.

Speaker Change: I want to say like we have that in here, but 6 and a half. I think they're in the 5770 5655 75 range and I would expect that to be maintained

Speaker Change: That's right.

Speaker Change: Thanks guys. Appreciate it.

Yep. 1 moment for our next question.

Speaker Change: Our next question comes from Jason Stewart with Jamie macgomery Scott, your line is open.

Jason Stewart: Hey, good morning. Uh, thanks for taking the question, um, on on the capital activity, um, for the share repurchases. And the issuance do you have a number, um, how that impacted both in the quarter either separately or together?

Jason Stewart: I don't have 1 on the buybacks, on the issuance, it was somewhere around and this is, you know, there's no precise way to measure this because you don't necessarily know what book value is at the moment you're selling shares. I tend to just look at end of day book to compare that to the issuance price which I'm not going to

Jason Stewart: J say is absolutely the best way. Uh, it was somewhere around 20 or 21 cents.

Jason Stewart: Uh negative in the second quarter. And it was about a positive 21 or 22 cents in the first quarter.

Uh but we sold more shares in the second quarter. So the cam combination of the 2 was about 99 and a half percent of book for the first 6 Months of the Year, net of fees. Yeah, net of fees. Using that methodology.

Jason Stewart: Okay.

All right, thank you for that. Um, and then just on the Roe range, you know, relative to the dividend. I know there's, there's tax differences, but I mean, if we think about the dividend today on a, let's use 724 for a current Book value.

Jason Stewart: That's a 199 payout Plus cost to operate. Um, relative to the ROI that you're talking about and the High Teens. Um, could you just help me think through how you put those 2 and how we should think about the the tax versus economic return difference?

Okay, uh, well first of all.

Mind that the mark-to-market of the portfolio affects the yield. So obviously as you mark the portfolio down, the yield is going to go higher and I think that's capturing a part of that. And he also think of it this way,

Jason Stewart: uh, whenever the mark to market the portfolio occurs, you also have

a realized or unrealized loss.

Jason Stewart: So that dividend yield might be 20% but you've also incurred a mark-to-market loss. Now that doesn't impact the dividend per se, but when you think of it from the total return perspective, yeah, you're paying a higher dividend, but you've got a mark-to-market loss. So what's the net of that? And compare that to what you're earning on New Capital. It also keep in mind that for tax purposes, when you close out a hedge, if the Hedge is in the money, you are required by tax law to allocate that Equity over the balance of the Hedge period. So when you look,

Jason Stewart: At the dividend, we pay.

Jason Stewart: Several, it's driven by taxable income. Some of that is a result of closed hedges.

So,

Over the balance of the Hedge period. So when you calculate your dividend for tax purposes you offset. Interest expense incurred over that period and then reduce it by that open equity.

Jason Stewart: That cash doesn't exist. That's just an artifact of the tax law. Now under the tax law, you might have Capital losses in that period but those don't affect the dividend calculation. Generally, in fact, with respect to calculating say taxes on under distribution of Reed earnings, you ignore capital gains. So those are kind of thrown out the window for that purposes. So in our dividend, it's it's capturing those effects. So the 1 you have this interest expense, uh, adjustment. But you also have the fact that your portfolio in this period went down in value. So, now, when you look at that yield as a percentage of the current Mark to marked value of the portfolio, it appears very high. So when we give you a role that's on a flatline basis. So from the perspective of Total return, that's just the carry

Jason Stewart: When you look at the Historical, It's a combination of carry and Mark to market gains or losses.

Speaker Change: Right. Does that help so yeah no that's helpful. So would it be fair to to say that the dividend policy right now is sort of being driven by the taxable distribution requirement and if that's right, you know how long till till that converges with maybe go forward economics

Uh it's I don't have that in front of me. I'm going to say it's maybe a year or 2 more. Yeah. Uh the bulk of it will be gone by then.

Speaker Change: Okay. But that's also keep in mind, keep in mind, this is important as we've grown, that's getting diluted.

Speaker Change: Right? So the dollar amount a year ago in the impact it has on the July 2024 dividend and the July 2025 dividend because we're larger on a per share basis that dollar that's going down.

Speaker Change: And so depends on what happens to the size of the company in the next year or 2. Just the exact magnitude of that effect. If we, if we were to continue to grow, that effect would become less more and more diluted.

Speaker Change: That makes sense. All right. Thanks Connor, thanks Bob. Thanks Jason.

Speaker Change: 1 moment for our next question.

Speaker Change: Our next question comes from Eric Haugen with btig. Your line is open.

Speaker Change: Hey Eric. Hey, thanks. Hey, how you doing, guys? Um, just as a matter of clarity, the book value update, does that include the dividend, uh, the acral for the dividend. I know. Yes.

Speaker Change: Yes. Okay. Okay.

Um you guys are always so thoughtful around market conditions. I mean do you expect? MBS spreads are more likely to widen or tighten into an interest rate rally specifically for the current coupons. Are there scenarios where we could you? You feel like we could get a curved steepener with lower rate ball?

Speaker Change: And how would you respond to that?

Speaker Change: Uh, mortgages have been directional uh, of late, um, a meaningful rally. Uh, depends what drives it. I don't know, you know, I think if it's a classic sort of rolling over of the

Speaker Change: Of credit to your would definitely see probably a pronounced widening into a rally like that. So you know economy starts to break and and credit cycle rolls over. Um I don't know that, that's our house view but um I think it's certainly a risk that we have to think about and um but for, you know, a more orderly Market. Um, like

Speaker Change: We've we've had over the course of the last, um, uh, couple of years at least, you know, I think we will push down to, as we push down to kind of the lower end of the recent rate range. Um, you'll see weakness in higher coupons as we would expect and, and, and a little bit of a tightening in the, uh, slight discounts. You know, I think that those will do those will continue to do well. Um, and you know, the opposite is true if we continue to have a very strong economy, which I think kind of the way we lean. Um, you know, we can see uh, re steepening of the curve from the front end as fed Cuts, get pushed out of the, the front very front end of the curve. And, um, you know, some of the weakness that Bob talked about in the longer end of the curve, uh, during his prepared remarks, uh, resulting from, you know,

Speaker Change: Much higher treasury issuance. I think we're seeing that continue to play out. Uh, we saw it in the swap spreads, you know, uh, in in April. And um, so we've we've got our eye on that. So I know that wasn't the specifically the risk you were addressing. But yeah, that's what we've been keeping our eye on. I I don't see the potential for significant widening.

Speaker Change: Uh, from here. And on the way I approach, it is just from the perspective of who the players are in the market. Um, if you look at it, the marginal buyer, to a large extent has been REITs and money managers. You know, fast money hedge funds are in and out all the time banks have not been involved much in what they tend to buy or floaters. Anyway um you know so for instance if you have the economy roll over and credit became a concern, I think money managers. If anything they're going to increase their allocation, the mortgages uh from the perspective of the meaningful steepening of the curve, let's say the economy weakens and the FED now is going to aggressively cut, which I don't think is likely to happen. But if it did, I think you could see Banks become another more meaningful marginal buyer. But in any of these scenarios, whatever this perturbation is to the market. I think it results in more buying of mortgages, not less. Uh, it's uh, you know, I I just really we're pretty cheap.

Here. Right now it's just hard to see us really getting a lot cheaper and that that shocked. I don't know what that is. Frankly.

Speaker Change: Right? But the house that you generally is that you don't feel like MBS spreads, really reflect the likelihood for the FED to cut rates before your end and the FED needs to deliver a cut. And that's going to catalyze MBS spreads to be tighter.

Maybe, I mean, we've been talking about fed cuts for so long. We can go all the way back to 23 and 24, uh, or not 23 2024 and earlier, this year, everybody's expecting the FED to cut it just keeps getting pushed out the economy's too resilient

Speaker Change: it's

Speaker Change: here's my metaphor. You get 1 of these a year. So My metaphor is the economy is a car. It's driving down the road, and it's the car goes too fast. If we grow too fast,

Speaker Change: The case and we think about it. What's the potential growth rate of the US economy to to a half percent? And we're running deficits at multiples of that?

So I just think the feds going to be continue to be challenged containing inflation and everything in this big. Beautiful bill is extremely stimulative. Uh, you know, they're going to full expensing of factories, trumps negotiating, trade deals, where all these countries have to agree to spend money in the US building. Uh, the multiplier effects of these things are a significant capex. Has a greater impact on growth than the housing market. There's a in terms of a multiplier and it just all these factors combined. I just don't see how the economy does anything but stay strong if not get stronger and inflation, stay the same or maybe even get worse. So that's my personal view, how that leads to Fed Cuts. I don't know. That being said, I think the curve can continue to even Steep and just because the term premium continues to grow and treasury issuance uh gets worse.

Speaker Change: I think it's really a question of what is neutral, right? So if somebody at the FED decides that rates are too high, in spite of all the things that we just discussed. Um

Speaker Change: Then, you know, they may cut rates a couple times. I not sure that they need to, but they may do.

Speaker Change: It. Why?

Speaker Change: They might revisit what neutral is the side that 4 and a half is pretty close.

Speaker Change: Yeah, I appreciate your uh, thoughtful responses as always. Thank you guys. All right, thank you.

Speaker Change: And I'm not showing any further questions at this time. I'd like to turn the call back over to Robert collie for any further remarks.

Thank you, operator. Thanks everybody. Uh, if you have any questions that come up later? Or if you happen to miss the call, I want to listen to the replay and then trigger that triggers a call. We'll be glad to take any and I'll call. So our number is 77222311140000 otherwise we look forward to speaking with you next quarter. Thank you.

Speaker Change: Hello, ladies and gentlemen, this is include today's presentation. You may now disconnect and have a wonderful day.